November-loading heavy sweet crude cargoes have traded at lower prices than for October despite initial expectations of increases on the back of gas-to-oil switching by power utilities amid amid skyrocketing LNG prices, market sources said Oct. 12.
Most recently, Petronas was heard to have sold via tender a 600,000-barrel cargo of Sudan/South Sudan's Dar Blend loading over Nov. 20-25 to a Chinese end-user at a premium of less than 50 cents/b to Platts Dated Brent assessments, FOB, according to a trade source.
In the last trade heard for the grade, Senning sold a similar-sized cargo of Dar Blend loading over Oct. 8-9 to a trading house at a premium in the low $2s/b FOB, S&P Global Platts reported earlier.
Inpex was heard to have sold a 350,000-barrel cargo of Australia's Van Gogh crude loading over Nov. 1-5 to an unknown buyer at Dated Brent plus around $7/b CFR Singapore, according to market sources. One trader pegged the price as equivalent to Dated Brent plus around high $5s/b on an FOB basis.
In comparison, Santos was heard to have sold a similar-sized cargo of Van Gogh crude loading over Oct. 25-29 to an end-user at a premium of around low $7s/b FOB.
The sharp drop in traded levels came as a surprise to traders, who were expecting stronger demand for low sulfur fuel oil to emerge from the power generation sector and lend support to the heavy sweet crude complex.
Support from gas-to-oil switching yet to materialize
Soaring prices of LNG over the past month were expected to induce power companies in North Asia to switch to burning the relatively less expensive LSFO during the peak winter demand season, leading to greater demand for the fuel oil, and subsequently, heavy sweet crudes.
The Asian LNG benchmark Platts JKM averaged $24.695/MMBtu in September, rising strongly from $17.035/MMBtu in August, and was last assessed even higher at $35.210/MMBtu Oct. 11, according to Platts data.
However, market participants said the limited number of oil-fired power generation plants in North Asia could cap the diversion of demand toward LSFO.
"Winter power generation demand is not really in place to support LSFO. Many will be surprised that Japan can't really switch to LSFO for power generation," a Singapore-based heavy sweet crude trader said.
Despite this, sellers remain optimistic of incremental demand for LSFO emerging from the power generation sector for winter, which could tighten the market in the near term and place upward pressure on prices of LSFO and, in turn, heavy sweet crudes.
"Expect the market has got a lot of upside potential as gas to oil switching is lagging. I think supply will greatly diminish in the coming [weeks] for LSFO and we will see a pop in values," a crude oil trader based in Australia said, adding that the scope for switching has not yet been fully utilized.
November-loading cargoes of Van Gogh and Vincent crude remain unsold as sellers bank on the potential strengthening of the market and hold on to their cargoes, sources said.
High flat price, easing cracks weigh on traded levels
Traders noted that aside from the lackluster support from gas-to-oil switching so far, a high flat price environment and softening LSFO cracks have also pressured traded levels of November-loading heavy sweet crudes.
"High flat price doesn't help [cash differentials], but for suppliers, even that level it's still OK considering the current flat price," a heavy sweet crude oil trader based in Southeast Asia said.
Meanwhile, the second-month Marine Fuel 0.5%S swap crack against the Dubai crude swap has been declining, averaging $7.50/mt in October to date, down from $8.35/mt over September, Platts data showed.
"[LSFO] crack has come off quite a bit from the peak," the Singapore-based trader said, referring to the trade for November-loading Van Gogh crude.